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Our forecast: Unchanged policy rate on 20 March

Islandsbanki Research has published a new interest rate forecast.

Highlights:

  • Our forecast: unchanged policy rate on 20 March
  • Inflation outlook brighter; breakeven inflation rate has fallen
  • Short-term economic outlook more ambiguous than before
  • Interest rate differential with abroad still sizeable
  • Unchanged policy rate through the end of the decade?

Further rate hikes off the table?

We expect the Central Bank (CBI) Monetary Policy Committee (MPC) to decide to hold the policy rate unchanged on 20 March, the next interest rate announcement date, leaving the bank’s key rate at 4.50%.

The MPC voted unanimously to keep the policy rate steady at its last rate-setting meeting. This was the first time since last October that no one opposed the Governor’s interest rate proposal. The prospect of a narrowing output gap and declining inflation expectations overshadowed concerns about the relatively bleak short-term inflation outlook.

Since the February interest rate decision, the short-term inflation outlook has improved somewhat, while the economic outlook has deteriorated. There are mounting signs that the output gap could narrow even faster this year than the CBI projected in February. The need for a tight monetary stance in the near future therefore appears to have diminished at a time when the stance has tightened, at least by some measures.

Presumably, the MPC will reiterate yet again its willingness and capacity to keep inflation and inflation expectations at target, which could call for a tighter monetary stance in coming months. We consider it quite likely, however, that the policy rate will be held unchanged through this year and that further rate hikes have been swept off the table for the moment, unless the current round of wage negotiations gives rise to excessive wage pressures and/or the ISK weakens substantially once again.

Central Bank Policy Rate March 2019

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